Indonesia’s Domestic Economy to Lift Shares Next Year

The Jakarta Composite Index rose 34.83 points, or 0.8 percent, to 4,316.69 on Friday. That brought the benchmark stock measure’s advance for the year at 13 percent, adding to last year’s 3.2 percent rise. It climbed 46 percent in 2010 and surged 87 percent in 2009.

This year’s gains were tempered amid concerns that the global economic slowdown would send exports lower. And they did. Prices of such commodities as coal, crude palm oil and metals declined in the second half as customers from Western nations, namely in Europe and the United States, curtailed purchases.

That has brought shares of coal miners Bumi Resources, the nation’s biggest, and Res o urce Alam Indonesia down by more than 60 percent.

Despite the negative second half, looking ahead, further gains may be in store for the Southeast Asian nation, which has the biggest economy in the region.

“For six months now, investors have been bracing for a slowdown in Indonesia,” said Aditya Srinath, strategist for Indonesia at J.P. Morgan Securities Indonesia.

“We had an overweight [position] in Indonesia up to June when we thought the drag on the commodity [sector] will start to show in the second half. Expectations had come down. When expectations are down and you started to see signs of a slowdown, you can actually start looking ahead and get more constructive,” he said.

Among stocks that Srinath recommends investors hold more shares than suggested by model allocations are banks, utilities and cement makers. Companies with small to mid-sized market values may offer better upside potential next year as most big capitalized stocks posted large gains in 2012, he said, declining to mention specific stocks

Next year, Srinath expects close to an average of 13 percent to 15 percent earnings growth in Indonesian stocks.

Combined profit in the third quarter among 40 of the biggest companies that reported as of last month rose 8.5 percent from a year earlier, according to data from Bloomberg.

While exports account for a fifth of Indonesia’s economic activity, personal spending takes up the lion’s share — at about 60 percent.

Record low borrowing costs have helped boost demand for land and homes, helping drive sales and profit for many property developers.

The year’s biggest gains belonged to construction and housing stocks, with the property index up 42 percent. Construction companies benefited by an influx of spending on infrastructure projects including roads, airports, seaports and factories across the nation.

Among individual stocks on the JCI, Centrin Online — an Internet services provider — topped gains, with a more than 11-fold increase. The biggest loser was Smartfren Telecom, a provider of telecommunications services, which dropped 92 percent.

Citigroup Securities Indonesia said in September that it forecast the JCI to end this year at 4,450 before rising to record 5,000 in 2013.

However, J.P. Morgan’s Srinath warns that Indonesia can be a volatile market in the short term, citing the rupiah’s decline.

The rupiah’s depreciation against the dollar may make foreign investors hold back from making large purchases. A weakening rupiah lowers the value of assets when any gains are repatriated into another currency such as the dollar.

According to Bloomberg data the rupiah has fallen 6.3 percent against the dollar this year, making it the second worst performer among major Asian currencies. Only the Japanese yen has lost more, falling 11 percent, Bloomberg data show.

In dollar terms that has made the JCI among the weakest performers in Asia, gaining 6.4 percent. By comparison, the Philippine Stock Exchange Index gained 42 percent, and Thailand’s SET Index climbed 40 percent, according to Bloomberg.

Overseas investors who typically made about half of total trading on Indonesia’s stock market now contribute less to overall turnover. According to data from the Indonesia Stock Exchange (IDX), they accounted for 43 percent of total trading for the entire year. In the final day of trading on Friday, foreigners made up 37 percent.

Some analysts are hoping that Indonesia’s economy will continue to grow at a brisk pace and that will help to contribute to growth in the stock market, as consumers have more disposable income to spend on goods such as cars, food and smartphones. Gross per capita income in the nation of 240 million people climbed to $3,500 last year from $3,000 a year before.

The economy grew 6.2 percent in the third quarter, and the government expects it to expand by 6.5 percent for all of 2012, which would match last year’s pace.

Still, other organizations are less optimistic on growth this year. The World Bank forecasts the economy growing 6.1 percent this year, before accelerating to 6.3 percent in 2013.

“As long as the economy continues to grow, capital market growth can be sustained. The consumer sector is still strong. Construction companies, cement makers, property developers and select banking stocks will also grow very strongly next year,” he said.